Q3 2021 Artisan Partners Asset Management Inc Earnings Call
Hello, and thank you for standing by my name is Jason and I will be your conference operator today.
At this time all participants are in a listen only mode. After the prepared remarks management will conduct a question and answer session and conference participants will be given instructions at that time as a reminder, this conference call is being recorded at this time I will turn the call over to make Kayla tap weren't director Investor Relations for artisan partisan.
Partners asset management. Please go ahead.
Thank you welcome to the artisan partners asset management business update and earnings call.
Today's call will include remarks from Eric.
Eric Colson, CEO and C J Daley CFO.
Our latest yourself, who investor presentation are available on the Investor Relations section of our website.
Sure My opening line for question.
Before we begin I'd like to remind you that comments made on today's call including responses to questions.
Let me deal with forward looking statements.
These are subject to risks and uncertainties and are presented in the earnings release and detailed in our filings with the S. E T.
We're not required to update or revise any of these statements following the call.
In addition, some of our Max made today will include references to non-GAAP financial measures you can find reconciliations of those measures. The most comparable GAAP measures in the earnings release.
With that I'll now turn the call over to Eric Colson.
Thank you Mikael.
Thank you everyone for joining the call or reading the transcript.
Thoughtful growth as one of our three foundational pillars.
Beginning 25 years ago during our startup phase we benefited from Cowen Free agency.
Architecture distribution rising public equity allocation and investment style categorization.
Over time, we naturally evolved into a global organization with non U S clients and investment strategies oriented towards a broader client base.
During both our startup and global growth periods, we benefited from a naturally growing client base and asset allocation trends working in our favor.
As our industry naturally ebbs and flows we have stayed true to who we are focusing on the business of investments people and trust, we have opted not to compete on scale and fees, but on investments and a performance.
We have taken the opportunity to expand guidelines with more investment degrees of freedom. So that our high value added active strategies better complement growing allocations to passive and exposure strategies.
Which have greater scale and lower fees.
And we have broadened our firm with credit and alternative oriented strategies.
By increasing our investment degrees of freedom and broadening our platform. We have further enhanced our firm as a natural home for truly active high value added investors.
Today, we believe exposure and scaled solutions are starting to reach many asset pool targets.
We also believe that demand for differentiated active investment strategies, including alternatives, we will continue to grow and broaden.
Looking forward, we think for growth opportunities are working in our favor.
Demand for differentiated credit income and yield oriented strategies.
The evolution of private markets and demand for alternative strategies.
The under allocation of portfolios to China, the world's second largest economy.
And ongoing industry disruption.
With new investment teams and strategies, we expect to capture these growth opportunities.
As we have done for 25 years.
And we expect to marry revenues from new strategies with compounding revenue growth in existing strategies.
Our view compounding revenue growth over a long time periods as more meaningful than net flows over short time periods.
Compound revenue growth requires that management of strategies Holistically managing capacity.
<unk> time, and duration fees and economic alignment to stack the deck in our favor the compound assets.
And generate strong compound revenue growth over a long periods.
On an annualized basis, our revenue has compounded annually at approximately 10% over the last 10 years.
Through new teams and strategies and steady compounding in existing strategies, we expect to continue to compound revenues and grow as we have in the past.
Slide two illustrates our two growth levers.
During the global period, we grew new strategies from zero to more than 21 billion in AUM.
AUM.
Today the strategies, we launched during the global period represents approximately $60 billion of our AUM.
While we were building and growing our global business, our existing strategies continue to compound client capital and more than doubled in.
AUM.
During the degrees of freedom period in the face of asset allocation headwinds, we added degrees of freedom and expanded our investment platform growing new teams and strategies from zero AUM to nearly 35 billion.
During the same time period, the existing strategies continued to compound generating approximately 67 billion in market returns and $13 4 billion and also adding another $33 billion to our total AUM. After returning 47 billion and net capital too.
Clients see.
Slide three summarizes the opportunities I mentioned earlier.
Our growth opportunities are driving our current outlook and new activity.
We have discussed three of these on recent quarterly calls.
We believe that investment talent and evolving the asset allocation preferences favor more new strategies to support the growth of later stage private and China focused strategies.
We also believe that continued consolidation and changes in the industry create disruption and external talent opportunities for us.
Finally, we believe that investment allocations for credit and yield continue to move in favor of active management.
All four of these themes align well with who we are.
They are not new but each has cemented in the last few years and it makes sense for us to invest more behind all four.
In addition, because of investments we have made in our platform and capabilities over the last several years. We are now in a position to execute across all of these areas.
There is no better example, on how we are executing that our newest investment team highlighted on slide four.
Mike Cirami, Mike O'brien, and Sarah Orvin joined US in September to build a new investment team focused on emerging market credit and macro opportunities.
This is a seasoned group with a long history together their opportunity set is broad in terms of countries currencies issuers and instruments.
Current and forward looking E M yields are attractive relative to alternatives, there is ample opportunity to generate alpha and differentiate from peers and the index.
Man from institutional and wealth channel investors as large.
Growing and we believe durable.
As allocators are hungry for yield and increasingly globalizing their credit allocation.
As we have always do an early innings, we are working with the team to bring together the people resources and plan to maximize the probability of success, we expect to launch the teams first strategy in the first half of next year.
On slide five.
We place with the new team will be doing within a simplified view of the broader credit landscape.
The new team's first strategies will fall into the EM debt and non traditional bond buckets.
Concurrently with establishing a new E. M team. We have started the process of launching a new floating rate loan strategy for our credit team.
Bryan Krug and his team has a successful history in the leveraged loan market and we expect to see strong demand for a dedicated loan funds.
As with the EM debt the leverage loan space is a large and growing opportunity set.
Poorly tracked by indexes and offer ample opportunity for alpha and differentiation.
By the Middle of next year, we expect to have multiple differentiated credit and yield oriented strategies managed by proven investment leaders and growing asset classes, where investment talent can add significant value.
Looking further into the future the skill set of both our newest team and our credit team lend themselves to further expansion into additional credit markets, where we believe scale participants and inefficiencies create significant opportunity for high value added investors.
Moving to my last slide.
The longest term trend and maybe the most powerful working in our favor as industry disruption.
The investment industry is constantly being disrupted and disrupting itself at the individual firm level and more broadly.
Artisan partners has always taken advantage of disruption.
We have always offered a unique combination of the investment autonomy and customization associated with owning one one firm and the resources and support offered by a big firm.
That remains true today, we provide investment leaders with investment autonomy and unwavering commitment to high value added active investing.
Customize resources, and a broad and expanding investment platform and.
Intentional business and franchise development with a history of repeated success.
Discipline on fees and capacity management.
Economic alignment and transparency and critically patients and a long term time horizon.
Since our founding 25 years ago, the number and types of homes for investment talent have proliferated.
And there are more options that look like artisan.
We believe our value proposition remains unique and there are a number of trends working to increase the supply of great investment talent. These include consolidation focused on scale and distribution not investment excellence, the packaging of investment ideas and strategies into products that marginalized.
<unk> water down investment excellence and disintermediation clients from investors.
Ever more pressure on flows and fees at the expense of investment returns and value added after fee long term outcomes.
Ever shortening time horizons, making it increasingly difficult to execute a long term investment strategy and maintain a quality of life.
These trends should create more and higher quality opportunities for us to partner with new talent and asset classes with long term demand.
We believe we are better positioned for future growth today than ever before we expect our current strategies continue compounding we expect to continue to add strategies and talent in line with the trends and opportunities I have discussed.
And we have a broad investment platform to leverage.
And the wind is at our back I expect us to continue to generate alpha for clients expanded opportunities for talent and grow revenue and returns for shareholders.
We will do it in our way consistent with who we are as an investment firm and over the long term time horizons, we target.
I will now turn it over to C J to discuss our financial results.
Thanks, Eric our strong financial results this quarter and this year reflect the patience and discipline required to successfully execute on our financial model, which are detailed on slide seven.
A combination of compounding client assets in excess of benchmarks with existing investment teams.
And investing in new teams and strategies had let has led to strong growth in both the quarter and on a year to date basis, when compared to prior year periods.
Assets under management as of September 32021 were $173 6 billion up 29% from $134 3 billion a year ago.
The strong growth in the U M. As a result of our ability to compound client assets.
When we refer to compound it assets, we are including the impact of market returns.
Generation in excess of markets and net client cash flows.
Our AUM compared to the second quarter of 2021 was down slightly as international market returns were modestly negative for the quarter.
More specifically in the first nine months of the year strong investment returns, including aggregate returns in excess of benchmarks contributed $13 5 billion to AUM.
Net client cash flows were $2 5 billion.
And as we expect investment returns, which represent the largest component of compounded client assets was primary contributor to the increase in our AUM during the year.
Average AUM was 177 6 billion for the quarter up 4% compared to the June 2021 quarter and rose, 36% compared to the September quarter of 2020.
Year to date average AUM was up 44% compared to the first nine months of 2020.
Assets under management by generation are on page nine.
Our third generation strategies continued to achieve strong growth on a year to date basis with AUM up 23% since the beginning of the calendar year.
And our first and second generation strategies continue to compound wealth for clients, both growing 7% in the first nine months of the year.
Growth over the much shorter quarterly time period was mixed as negative markets and flat net client cash flows drove a 1% decline in AUM.
Yeah.
Financial results for the quarter and year to date periods are presented on the next two pages.
Our complete GAAP and adjusted results are presented in our earnings release, My comments will focus on our adjusted results.
Revenues grew 4% compared to the June 2021 quarter, and 36% compared to the prior year quarter.
Both period increases were due to higher average AUM.
The weighted average management fee rate at 71 bps remained consistent across all three quarters.
Adjusted operating expense also increased 4% compared to the June 2021 quarter, and 28% compared to the prior year quarter.
The increases in both periods were primarily the result of higher variable incentive compensation costs on increased revenue and an increase in the number of full time employees, including members of our newest investment team.
Our adjusted operating margin was 45, 2% in the current quarter compared to 45, 3% in the June 2021 quarter and improved meaningfully up 340 basis points from the prior year's third quarter margin of 41, 8%.
Adjusted net income per adjusted share was $1 33 in the current quarter.
Our financial results for the nine months ended September 30th.
Reflect the same themes as of quarter really results I just highlighted.
Revenues in the nine months period increased 43% compared to 2020.
Also due to an increase in average AUM.
And given the variables design of our financial model expenses rose, 29%, reflecting higher incentive compensation.
Our adjusted operating income rose, 65% and our adjusted operating margin was 44, 2% up 590 basis points from the prior year to date margin.
Our balance sheet continues to remain strong and support our capital management practices.
We maintain approximately $100 million of excess cash to fund operations seed new products and make continued investments in new teams operational capabilities and technology. In addition, our $100 million line of credit remains undrawn.
Yeah.
Our board of directors declared a quarterly dividend of $1 seven per share with respect to the September 2021 quarter, which represents approximately 80% of the cash generated.
Next quarter, our board will consider the declaration of a special dividend as well as our regular quarterly variable dividend.
The amount of the special dividend varies year to year as the generation of cash fluctuates each year and the need for capital to run our business and seek new products may vary.
Looking forward to next quarter's results our U S mutual funds make the required annual income and capital gains distributions in the fourth quarter.
This year as a result of very strong investment results over the past year, we estimate that assets managed for clients and our mutual fund vehicles have generated approximately $8 billion of net realized gains and income for our clients.
Generating income and gains for our clients as our primary purpose and by all accounts represents the success of our firm.
The majority of the income and gains required to be distributed to clients will be reinvested, but some clients choose to not reinvest generally to pay taxes and fine liabilities.
This year, we anticipate that amount of income and capital gains distributions that will not be reinvested will be approximately $2 billion.
This amount is broken out separately in our AUM roll forward.
The last two slides highlight the financial impact of our thoughtful growth strategy. We are a growth firm and over time, our results have consistently produce sustainable long term growth.
Over the global and degrees of freedom periods, Eric discussed revenues compounded annually at 11, 1% and seven 4% respectively.
Over the combined periods, our firm has grown revenues at a compound annual growth rate of nine 3%.
While it is hard to compare growth of operating income over the pre IPO period with our public company history.
Since 2013, our adjusted operating income has grown over 80% and adjusted earnings per share of nearly doubled.
If you combine the impressive growth we have experienced since going public in 2013.
With distributions of cash dividends, which approximate 8% annualized yield over the same period.
The total return to shareholders has been approximately 15% compounded annually.
As a growth company, we are confident that if we remain disciplined in the management of our business and patient for the market to recognize our growth potential we will remain an attractive investment for our shareholders.
That concludes my comments and we look forward to your questions I will now turn the call back to the operator.
Thank you we will now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Our first question comes from Dan Fannon from Jefferies <unk> Company. Please go ahead.
Thanks wanted to talk about the private markets opportunity, which you've highlighted on the in terms of incremental growth going forward can you talk about what strategies.
You have today that allow for that and or is it something we could see from our degrees of freedom going forward something you will potentially open up for some of the funds that don't provide that today.
Hi, Dan it's Eric we have.
Have one strategy.
The China post venture that is currently investing in private companies.
That.
Launched the last year or this year and then.
Our growth teams are a growth oriented teams.
<unk> had been medium with private companies, especially as you go down the market capitalization over the last few years.
That has been picking up.
So on a go forward basis.
We will see.
Many of our growth team start to we then private investing either adding to existing strategies with regards to degrees of freedom or more of a hybrid strategy similar to the China Post center.
Got it and then as a follow up just a general question on capacity.
So first on slide five where you kind of lay out the credit opportunity and the role of the kind of roadmap for future products can you. So can you give us a sense of kind of how you think about capacity within certain of these areas. You gave obviously some of the market sizes, but the strategy is as you think about scaling them.
Is it is it something where theres limit limits in the in terms of a certain size levels and then at the broader firm level are there other funds or strategies that you are watching or close to thinking about you know the on the on the watch for potential capacity constraints.
Yeah.
The size of the size levels are always a difficult too.
Estimate.
As we look at each of our franchise eggs they grow in different ways and so in some cases it may be limiting the the size because you're leveraging that.
Segment of the marketplace into broader strategies so.
High income strategy does use levered loans as part of its strategy and as we think of.
Future strategies that use degrees of freedom versus just purely dedicated strategies to that segment that has to come into the equation.
So we don't have a set number and I think if you look back in time.
If we looked at our small cap strategy, our mid cap strategy, we launched it, especially small cap I mean back then you invested below $1 billion in market cap and you were really constrained to an asset size below 1 billion in mid cap was maybe three or 4 billion in that.
That same time international probably it was only a few billion dollars as well and you never know how markets evolve or how the franchise grows.
And where youre going to leverage the ideas and put those to work, but we do believe that these are sizable strategies that we're launching.
That they have meaningful demand and they'll be generating good growth for the firm for the next decade.
With regards to capacity management, we have obviously over the last couple of quarters announced that we were managing capacity.
Yeah. Our view on capacity management is you have to put an option in place to control.
A run up in performance or a large flow coming in that could hurt the integrity of our strategy.
The compounding of the performance is the most important element to growing our revenue.
And if you don't have that in place before that growth occurs then you can never catch up to controlling to help the integrity.
So we do have.
We have no new announcements on our strategies.
Strategies that we're managing capacity as of this quarter and the current ones that we are managing continued to grow at a nice rate, but in a controlled manner.
Understood. Thank you.
Our next question comes from Kenneth Lee from RBC Capital markets. Please go ahead.
Hey, Thanks for taking my question just one follow up on the.
Credit strategies, you talked about some expansion potentially within the credit side.
Looking further out how.
How large could the AUM.
Grow in the future for artisan and.
Do you see credit strategies, becoming a very material proportion of overall AUM over time. Thanks.
Okay.
Yes, if you combine the potential with the with the credit team with Bryan crude and the.
New team, we just brought on led by Mike Cirami.
Definitely the aggregate of those two could be very material.
Coupled with the potential teams in the future.
And.
The the breadth of each of these teams will have a.
An element that is.
Traditional as well as alternative.
So we are kind of control our traditional sizing.
Maybe a little bit lower than the big bucket scale players in this category. So that we have room to manage the alternative.
High degree of freedom.
<unk> of these teams the credit team is a very good example of managing the flow into high income. So that allows us to have the flexibility to move a levered loan.
The strategy into the market as well as we have a credit opportunity strategy that gets us into an alternative credit space. So we will manage the balance between traditional and alternatives.
But on an aggregate basis there'll be very meaningful in our revenue.
And the the strategies that we're selecting in the credit space like all of our strategies.
Our high value added strategies. So you could expect a higher return than what you'd see in a traditional shop.
Which obviously generates a higher compounded revenue growth that we've seen over the various time periods. We listed on slide two.
Okay.
Great very helpful.
And just one follow up if I may so it sounds like from the prepared remarks.
A favorable environment right now for potentially adding new investment teams I'm, just wondering whether you could just share with us any extended outlook for the potential to add new investment teams are in the near term. Thanks.
Not only reinstate it has a a favorable environment and.
We've.
Outlines a few.
Spaces that we're interested in given that our growth in asset allocation.
The growth in the number of securities and opportunity to be a high value added in this space.
And the talent that's emerging around those categories.
Yeah.
Gotcha very helpful. Thanks again.
Again, if you have a question. Please press Star then one the next question comes from Robert Lee from K B W. Please go ahead.
Great good afternoon, or good morning, as the case may be thanks for taking questions.
I have a question on the really just kind of the maybe some of the.
Expense or spending headwinds that may be out there. So I mean, you talk is.
In the past about seeing.
Even aside from adding new teams you know maybe comp pressures, you're not seeing you're kind of widely I guess close more industries, but you know it is have you seen that.
Come into the numbers you know how does that influence how you know maybe we should be thinking about you know.
Some expense pressures and into next year, then by the same token in addition to adding the new team.
No.
Whether it's coming out of Covid travel picking up you know, maybe you know new technology or spending initiatives just trying to get a sense of how we should think of the maybe the progression.
<unk> spend into 2022.
Good Great question Rob.
We're currently in our budget season so.
We don't have anything fully baked yet, but certainly there is there is pressures on all of those and we would expect our spending levels to increase next next year as we execute on our growth strategy.
Including the Onboarding of the EM debt team.
And.
Specifically our comp ratio.
Has declined from 48% to 50% down to.
<unk> 45, 46%, we would expect that to expand a couple of hundred basis points.
Into next year as we are.
Continued on onboard individuals' too.
To build our infrastructure for our growing.
Our growing business.
Tech spend as is.
Everybody's experience continues to to grow in high single digits into low double digits.
And then.
On the occupancy side, we're we're planning to open a couple of new offices, one for the EM debt team next year and then.
Expand.
In other areas.
As we continue to grow so.
I would expect you know.
Low double digit.
Growth in expenses next year, but we're still we're still sort of working through that in the budget process.
Okay, Great and then in terms of investment spend.
I mean, a few years ago I think you spent some time and energy you know investing in the wealth channel and when we saw it starting I guess last year you know this noticeable step up in gross sales in that channel or.
Or at least the fund business so.
Are there are you know.
Are there any kind of specific distribution initiatives that maybe underway, whether it's globally or other channels, where you are currently investing or plan on investing where.
You know maybe in a year or 18 months or two years, you know you're kind of setting the seeds for maybe another kind of stair step function or just trying to get a sense on the distribution side, where you're where you're investing.
Yeah.
Yeah, we continue to invest in the wealth channel globally is.
The primary focus of.
New spend and as you.
Marry that with the newer strategies.
That'll be our focus.
Bringing these newer higher degree of freedom strategies.
Tend to be a little bit more alternative oriented into the wealth space.
Think about the the China post venture the credit opportunity strategy.
And some of our newer strategies, we're thinking about.
We're investing at the margin in the wealth channel.
And how that stair step occurs.
We can't control the timing, but we control the quality of the talent the the type of strategies and our view on asset allocation.
And our view is that.
Credit and yield oriented strategies are going to be in higher demand, we think that given the growth of China and looking at the index breakdown and asset allocation that many you'll realize they're under allocated to a very growing segment of the world.
And as a more allocators look at private investing in how to.
Create hybrid or crossover strategies to get exposure to hybrid.
And crossover strategies.
We believe that private investing is going to become more meaningful.
And with those areas.
Areas of growth, we believe the wealth channel will be the greatest opportunity.
Yeah.
Great. Thanks for taking my questions I appreciate it.
Again, if you have a question. Please press Star then one.
There are no more questions in the queue. This concludes our question and answer session as well as the conference. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Yeah.
[noise] [music].
Okay.
[music].
Yeah.
[music].
Yes.
[music].
Yes.
Thanks.
[music].
Yes.
[music].
Yes.
[music].
Yes.
Okay.
Okay.
Yes.
[music].
Yes.
Okay.
Yes.
[music].
Yes.
Okay.
Right.
Okay.
[music].